The production line would be set up in unused space in Solomons' main plant. The machinerys invoice price would be approximately $175,000, another $9,000 in shipping charges would be required, and it would cost an additional $20,000 to install the equipment. The machinery has an economic life of 4 years, and Solomons has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $20,000 after 4 years of use.

The new line would generate incremental sales of 1,150 units per year for 4 years at an incremental cost of $105 per unit in the first year, excluding depreciation. Each unit can be sold for $195 in the first year. The sales price and cost are both expected to increase by 2% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 11% of sales revenues. The firms tax rate is 35%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 9%.

e. Estimate the required net working capital for each year, and the cash flow due to investments in net working capital.

Annual Cash Flows due to Investments in Net Working Capital

Year 0

Year 1

Year 2

Year 3

Year 4

Sales

NWC (% of sales)

CF due to investment in NOWC